Property Management Flashcards
PROPERTY MANAGEMENT RICS DOCUMENTS:
RICS Commercial Property Management in England and Wales, 2nd edition Guidance note (2011)
RICS Real Estate Management, 3rd Edition, October 2016 (Professional Statement)
RICS Code for Leasing Business Premises, 1st Edition, February 2020 (Professional Standard)
Core duties of a property manager?
Collection of rent, service charge and other sums
The management of the property
What are some of the core duties of a property manager?
Liaising and reporting with the landlord
Collection of monies
Client accounts
Defaulting occupiers
Service charge
Deposits
Managing the building
Management policies
Insurance relating to the building
Occupier liaison
Energy management
Building management systems
H&S and Fire Safety
Procurement of third party suppliers
Tell me about your responsibilities for communal areas?
Ensure effective operation of the property - monitoring potential problems and seeking to comply with the service charge budget
Understand the landlords responsibilities to repair and maintain communal areas
Ensuring H&S compliance
Tell me about your responsibilities for vacant buildings
Undertake vacant unit inspections/ liaise with insurers on this
Complete a void shortfall form - so SC for the unit becomes a landlord liability
Notify the council so rates and received and paid on behalf of the client
Ensure building is safe
Talk me through the process of a tenant not paying rent and how you would remedy this:
If a tenant has not paid rent or is persistently late in the payment of rent the first thing to do is contact the tenant to discuss or meet tenant on site to discuss and find out why they have not paid, is there a reason?
Before making a decision on remedies for non-payment of rent - request to see ACCOUNTS (audited and management)
The recommended remedy will be dependent on each scenario
Payment plan
Guarantor/AGA
Draw down on rent deposit
CRAR
Statutory Demand
Surrender/forfeiture
Payment plan
Read the accounts first to see if this is justified
Will only be suitable if the tenant can actually meet payments
It is a short-term measure
Needs to be agreed in writing
Will be personal to the tenant
Guarantor/AGA
Is there a Guarantor in place? (Check the lease)
To pursue a Guarantor you would serve a Section 17 notice of the L&T Covenants Act 1995 - this allows the LL to claim against the Guarantor within 6 months
If the Guarantor settles the arrears they are entitled to take an overriding lease
Is it a new or old lease? There are still old leases in place, those pre 1st Jan 1996 - this means there would be privity of contract
When can former tenant be pursued for arrears?
If the Lease is an OLD LEASE and started before 1 January 1996
Privity of Contract was abolished by LL & T (Covenants) Act 1995
Before this, any tenant who was original tenant under lease was responsible for rent and other covenants throughout the term (even if lease had transferred to new tenant).
Or if there is an AGA in place.
Draw down on the Rent Deposit
Check that there is a rent deposit - there will be a rent deposit deed
The rent deposit deed will be attached to the lease (it will require topping up if drawn down from)
What should be considered before drawing down on rent deposit?
Tenant covenant strength - will they be able to top it back up?
Future debt - if tenant struggling, may be wise to keep deposit for future debt i.e. dilapidations
Does LL need to give T notice before drawing down on rent deposit?
Depends what it says in rent deposit deed
Benefit of drawing down on rent deposit?
Good if tenant only struggling short-term and LL wants to keep tenant in occupation
Provides relief for tenant so they can focus on recovering business
Tenant can top up deposit when more financially stable
How would you manage a rent deposit?
Comply with Rent Deposit Deed
Hold funds in separate bank account which is designated as tenant deposits
Need these funds protected in case LL becomes insolvent
CRAR
CRAR’ is only available in ‘pure’ rent arrear cases, it replaced the common law right to ‘distress for rent’.
Only Rent, VAT and Interest on that Rent are able to be recovered.
Service charges, insurance, and other charges are not capable of being recovered under this legislation.
If Rent is ‘inclusive’ when seeking recovery under CRAR the sum must be split into an element applicable for rent as only this will be recoverable - the proportion for any service charge/ rates etc. must be stripped out of the calculation.
Before recovery can be sought under the legislation, the debt must be a minimum sum, this is set at 7 days rent arrears.
Under CRAR provisions Enforcement agents require mandatory training and certification, the introduction of set costs for the industry, and regulations restricting behaviour.
Requirement for the landlord to serve a ‘NOTICE OF ENFORCEMENT’ on the tenant giving a 7 DAY notice period before sending enforcement agents.
(Creditors can go to court to request a shorter notice period if they believe there is a risk of the debtors removing goods, but this will mean more landlord costs are incurred)
Enforcement agents MUST NOT take control of good which have a value which is more than the debt together with costs. They must then wait at least 7 clear days before goods can be sold.
Can only take control of goods belonging to the Debtor
Goods necessary for the debtors personal use or in correction with employment, business, trade etc. are exempt up to an aggregate value of £1,350
Items in use by the debtor may not be taken control of if such action is likely to result in a breach of the peace.
Landlords cannot use CRAR if part of the property is being used for residential purposes.
What is CRAR?
Commercial Rent Arrears Recovery
Replaced ancient law of distress for rent
Introduced in 2014
Available to commercial Landlords to recover rent (plus VAT and interest)
No minimum amount of arrears required
What are CRAR timelines?
7 days unpaid rent
7 days notice
Enforcement Agent visits
7 days before sale of any seized goods
What goods cannot be seized under CRAR?
Perishable goods
Tools of the trade below the value of £1,350
Any goods proved to belong to a third party
What are tenants’ rights under CRAR?
A commercial tenant does have the right to delay the enforcement action once they receive this notice. They can do this by asking a court to either:
grant a delay of execution; or
set aside the enforcement notice.
Where a commercial tenant faces the CRAR process, they have the right to enter into a controlled goods agreement. This allows them to pay the rent arrears over a period of time. If they negotiate this, their goods must remain on their commercial premises.
Statutory Demand
A preliminary step to pursuing bankruptcy/winding up procedures
Advisable only when there is NO dispute about the level of arrears
Can be seen to be and AGGRESSIVE Tactic
Tenant has 21 days to pay the arrears
Used for debts in excess of £750
What is the process of serving a Statutory Demand?
Notice served and T has 21 days to pay or propose plan
After this time, LL can present winding up petition to Court
Surrender
Where L&T agrees to release the tenant from its obligations
Does not have to be consideration - can be a nil premium
Normally only done when LL is confident of reletting or wants to redevelop
I.e. If another tenant, with a better covenant, is interested, offering a higher rent etc. a surrender may be best - it would be done on a mutual basis so surrender and new lease is done simultaneously, not to put the client at risk.
Forfeiture
S146 notice is in relation to breach of repairs - tenant usually has 6 months to adhere to the notice i.e. carry out repairs etc. - should they fail to do it, after this time you can forfeit the lease.
Aggressive tactic to take back possession of the property
Check to make sure there is a forfeiture clause in the lease
Rent must have been properly demanded or received
Lease would be forfeited by the landlord entering the premises peaceably
Tenant has the right to apply to the court for relief from forfeiture and this can be delayed by 6 months
Where could you suggest forfeiture:
Where the tenant is paying below market rent, but you would only really do if you have another tenant ready to go in.
So is there grounds to forfeit the lease and is there another tenant which offers better covenant strength, possibly willing to pay a higher rent etc.
FORFEITURE FOR NON-PAYMENT OF RENT IS WALK IN POSSESSION (lease usually gives 21 days to pay rent before proceedings can commence)
FORFEITURE FOR BREACH OF LEASE/REPAIRING OBLIGATION IS TO SERVE A SECTION 146 NOTICE AND TENANT GETS 6 MONTHS.
What are tenants rights under forfeiture?
Tenant has the right to apply for relief from forfeiture
Can only apply to Court as they are only one that can grant it
If they grant it, lease is restored as though forfeiture never happened
How can LL right to forfeit be waived?
Demanding rent that is due in advance, for example, will usually waive the right to forfeit
Accepting rent after the landlord becomes aware of a breach will also waive the right to forfeit
Negotiations can also have the effect of waiving the right to forfeit where those negotiations relate to the breach
If LL agrees payment plan with T
If CRAR is exercised
If S25 notice is served under LL & T Act 1954
How can lease be terminated by forfeiture?
Landlord can peacefully re-enter and change locks
Court proceedings can commence to recover possession
Why is it important to look at management accounts as well as audited accounts?
The audited accounts might be a year or so out of date, because you submit these 9 months after year end
Management account shows how business is doing on monthly or quarterly basis
Two fundamental principles of rent collection?
Accuracy of information provided
Timing of when demands are sent out / rent is collected by
Difference between standing order and direct debit?
Standing order = regular payment set up by payer, and payer has control
Direct debit = payer authorises the payee to take payments
Typical lease terms regarding interest on late rent?
2-4% above base rate 14 days after due date
How can Court proceedings be used to recover tenant arrears?
LL can obtain court judgement
High Court Enforcement Officer may then enforce this but need to pay court fees
Similar to CRAR
Can be useful if tenant is still solvent as threat of going to Court may prompt payment!
However - slower process, more expensive etc
What is key consideration when reviewing rent arrear recovery methods?
Chance of re-letting the property
Current passing rent vs market rent (market conditions)
Vacant possession value and void cost, vs value as let
Service charges
Service charges in commercial property, 1st edition (2018)
What is a service charge?
An amount that tenants pay to cover the cost of providing communal services to a building or the surrounding estate
Aims of Service Charge Professional Statement?
Improve best practice, uniformity, fairness and transparency in management and administrations of service charges
Ensure timely issue of budgets and YE certificates
Reduce cause of disputes, and provide guidance on dispute resolution
What are the 9 mandatory requirements in Service Charge Professional Statement?
Recover expenditure in line with lease terms
Recover no more than 100% of costs
Annually provide budgets and explanatory notes
Annually provide service charge accounts (showing actual figures)
Annually provide service charge apportionment schedule
Service charge money to be held in separate bank account
Interest must be credited to SC account
When acting for tenant, advise that if disputing payment then withhold the amount in dispute
There are also 24 CORE Principals:
One being VALUE FOR MONEY: The manager should procure quality service standards to ensure that value for money is achieved at all times. The aim is to achieve effective, value for money service rather than merely the lowest price
Costs should be transparent
Management fees must be on a fixed basis
What are the timescales for reporting within the Service Charge Professional Statement?
Issue budgets, including comments and matric, minimum 1 month prior to start of SC year
Issue reconciliation / expenditure certifications, with explanations, within 4 months of SC year-end
What is a budget?
The expenditure estimated that will be incurred in a given service charge accounting period
How can you achieve value for money?
procure quality service standards - achieve value for money as opposed to cheapest price
Competitive tenders
Formal re-tendering
Responsibility of Property Manager when issuing service charges?
Ensure value for money
Ensure quality services that are regularly reviewed
Ensure standard of services are monitored
What is a sinking fund?
A fund formed by periodically setting aside money for the repair or replacement of wasting assets’ e.g. periodic maintenance such as roof repairs needed every 5 years
What is a reserve fund?
A fund set aside to cover the cost of major works or other significant items of expenditure
Useful for unexpected expenditure
What is a depreciation charge?
Measure of the wearing out or reduction in life of an asset
Depreciation distributed across the useful life of the property (rather than taking one larger deduction the year you buy or improve the property)
4 methods of service charge apportionment?
Floor area
Fixed percentages
Weighted floor area (typical in shopping centre)
RV
MANAGEMENT FEES
Fees are set on a fixed price basis rather than being calculated as a percentage of expenditure - usually a fixed fee subject to annual review or indexation
A % is not appropriate as it is considered to be a disincentive to the delivery of value for money
Code states that the cost of collecting rent should be excluded from the service charge management fee
Is Assignment or Subletting permitted?
Check the alienation provisions in the lease
Normally assignment is permitted with LL consent not to be unreasonably withheld or delayed
Subletting of the WHOLE is usually permitted (not part)
What is the difference between an assignment and a subletting?
Assignment means that the tenant no longer has any obligation under the lease (unless there is an AGA) and has no direct communication with the landlord - Tenant transfers legal interest in lease to another tenant. Incoming tenant takes over lease obligations.
Subletting is when the tenant creates another lease below theirs. They will receive income from the sub-tenant but will still be responsible for paying the landlord. - Lease property from tenant, rather than Landlord. Original tenant maintains relationship with Landlord, and sub-tenant has relationship with original tenant.
Difference:
With assignment, original tenant is no longer liable under the lease. With sub-letting, original tenant remains liable but creates new relationship with sub-tenant. Landlord and sub-tenant have no direct relationship.
Why would a tenant would rather a Sub-let rather than assign?
If market rent is higher than passing rent, then tenant could get profit rent
If they wish to reoccupy in the future
What is the process for dealing with assignments/subletting’s?
Check the lease
Get an undertaking for Landlord costs from the assignee
What is the covenant strength of the proposed assignee/subtenant?
What is the proposed rent, more than, same, less than?
Are there reasonable grounds to refuse consent? (could be for covenant strength, tenant mix reasons)
L&T Act 1988 means approval cannot be unreasonably withheld and you need to deal with the application PROMPTLY
Subject to agreement a Licence for Assignment/Subletting will need to be drawn up
Consider what is the impact on the investment value of the property?
The Landlord and Tenant (Covenants) Act 1995
Came into force 1st Jan 1996 replacing PRIVITY OF CONTRACT
(Privity of contract meant the original tenant was on the hook throughout the length of the lease) - so the Covenants Act removed these ongoing liabilities
Deals with assignments ONLY (not subletting’s)
Brought in AGA’s (Authorised Guarantee Agreements) to protect the Landlord
Applies to only 1 assignment so if the assignee then assigns again to a new tenant you will lose the original covenant
To pursue a former tenant under the Covenant’s Act a S17 notice must be served within 6 months of the arrears. If the former tenant settles the arrears then an overriding lease can be created.
The code for leasing business premises says that and AGA should not be a condition of the Assignment UNLESS the proposed assignee is of a weaker covenant.
According to RICS Code of Leasing Business Premises, when should AGAs be used?
If assignee is of weaker covenant strength, does not have a suitable guarantor and does not pay a suitable rent deposit
What are some of the key obligations associated with collection of monies?
Have a thorough understanding of the relationship between landlord and occupiers
Understand all relevant documents, such as leases and licences
Maintain a database to record financial position of occupiers
Put payment processes in place, clear for occupiers
Have a mechanism in place to notify any default in payment or dispute over payment
Have a process to promptly purse defaults
Have a process to forward client money to the landlord
What are the requirements under RICS Real Estate Management for rent demands?
You should submit rent demands in a timely manner and ensure they are clear and understandable by tenants
→ relevant taxation should be included in the demand
What are the requirements under RICS Real Estate Management for rent arrears?
You should ensure you have efficient systems to monitor rents collected
→ issue standard letters chasing arrears
→ keep client informed
How can you protect the security of Client Money?
By ensuring you/your firm are registered with the RICS Client Money Protection Scheme - A scheme that reimburses landlords and tenants should an agent misappropriate rent, deposits or other client funds
What is a reconciliation (client money)?
Monthly exercise that formally documents the agreement of the bank statement balance to the total of Client money held
→ Showing cashbook, ledger, and bank statement balances, with any reconciling items clearly explained
What controls should be in place relating to holding Client money?
Keep records and accounts that show all dealings with Client money and demonstrate that all Client money held by the firm is held in a Client money account
Complete regular account reconciliations and demonstrate these are reviewed by a principal
Ensure that overdraw balances are prevented by the firms systems and controls, if these do occur, investigate immediately
Publish written procedures for handling Client money → make this available
Have appropriate systems and controls to ensure transfer or withdrawal of Client money, in accordance with instructions from the Client
Dilapidations
RICS PROFESSIONAL STANDARD Dilapidations England and Wales (2016)
What is the purpose of Dilapidations?
Entitles the Landlord to get the property back in the same condition as it was handed over to the tenant in
What is the process?
Review the repairing obligations in the lease to see if it is a FRI
The lease will confirm if there is a schedule of condition (If the property is leased to a tenant in poor condition, the tenant will want a record of the condition so they are not made to put in back in Better condition than when they signed the lease) - normally a written and photographic record.
If a Schedule of DILAPIDATIONS is served it can be negotiated by the tenant, once agreed, the tenant can either do the works themselves OR pay an agreed amount for the Landlord to do the work.
Landlord is permitted to carry out the works themselves and recharge the tenant if agreed - there is a clause in the lease which allows this: Jervis vs Harris.
What are the 3 forms of schedule of Dilapidations?
Interim Schedule: served during the lease (min 7 years) but normally where there is AT LEAST 3 YEARS remaining on the lease - either by the landlord or tenant - refer to the Leasehold property repairs act)
Terminal Schedule: Served within the last 3 years of the lease
Final Schedule: Served at lease expiry or after the tenant has vacated the property
What is the claim of dilapidations based on?
The costs of the works OR the diminution in value (in accordance with S18 L&T Act 1927)
In what circumstances can you not serve a schedule of dilapidations?
If the building is going to be redeveloped
How do dilapidations relate to alterations?
LTA is an ‘extension’ of the original lease and so will be considered at lease end → if required to reinstate to original condition, it will be included within dilaps works/settlement
Insolvency
Insolvency Act 1986
